One of your new employees notes that your debt has a lower cost of capital

(7%)

than your equity

(16%).

So, he suggests that the firm swap its capital structure from

27%

debt and

73%

equity to

73%

debt and

27%

equity instead. He estimates that after the swap, your cost of equity would be

19%.

a. What would be your new cost of debt? Make your calculations based on your firm's pre-tax WACC.

b. Have you lowered your overall cost of capital?

a. The new cost of debt is

enter your response here%.

(Round to two decimal places.)

b. Have you lowered your overall cost of capital?(Select the best answer below.)

A.

Yes, because your overall cost of capital (WACC) is not determined by the risk of your assets.

B.

Yes, because your overall cost of capital (WACC) is determined by the risk of your assets.

C.

No, because your overall cost of capital (WACC) is determined by the risk of your assets.

D.

No, because your overall cost of capital (WACC) is not determined by the risk of your assets.